Method of managing financial instruments, equipment lease derivatives and other collateral instruments, data architecture, application and process program

ABSTRACT

A computer-implemented process ad methodology that selects collateral instruments such as equipment leases, using mathematical models, based on selection criteria, risk-reward relationships, and maturity needs resulting in the creation of new financial instrument derivatives. These new derivatives allow for creation of secured private equity, public equity, mutual funds and venture capital funds where the investors&#39; principal is safeguarded against loss regardless of the performance of the investments being made. A two-tier investment structure is created whereby the principal amounts from the fund are invested in specially identified high yield vehicles such as residual equipment leases with high yields over certain maturities. The high yield cash flow only is then invested in higher risk investments such as venture capital start-ups companies.

The present application claims priority from U.S. Application No.60/299,367 filed Jun. 19, 2001.

BACKGROUND OF THE INVENTION

This invention relates generally to financial instruments. Moreparticularly, this invention relates to a method andcomputer-implemented process for creating lease backed financialinstrument derivatives yielding higher than market returns.

Investment vehicles such as venture capital funds have certain risks.Venture Capital generally refers to the business of financing newbusiness undertakings, usually high risk, in the hopes of reaping largerewards if the new business is successful. In a typical scenario, aninventor or group with a new idea will ask a venture capital fund togive them money to start a business built around the new idea. Thefinancial return of the venture capital fund may be large, or in manycases the investment can be a total loss.

Due to the high-risk high-reward nature of such investments, the amountof investment capital available to fund such investments is very limitedas investors are concerned about losing their investment. This newmethodology is directed at solving the problem so investors can puttheir principal into higher risk investments like venture capital butknow that their principal investment has been secured. This method,would minimize the risk of losses in failed businesses, and would permitinvestors to continue to finance worthy enterprises without concernabout the security of their original principal.

As an example, consider a typical Venture Capital fund with a 10 yearlife that has raised $100 million to invest in start-up companies. Outof this funds, 2.5% per year for 10 years or $25 million goes formanagement fees and is not invested, and another 10% is then set asidefor reserves, leaving 65% or $65 million that is actually invested instart-up companies. If this $65 million is invested over 5 years, itresults in $13 million or 13% per year of the starting capital beinginvested over 5 years. Now, if the fund does well and averages 5 timesreturn on invested capital, the $100 million fund can generate a 10 yearreturn of $13 million×5 years×5 times=$325 million. However, if the funddoes badly as in the case of several funds that invested in Internetstart-ups, the investors can lose the entire $100 million resulting in a100% loss.

With the secured fund methodology according to the present invention wetake a different approach. From the $100 million in the fund, 10% alsogoes into a reserve but the balance $90 million is first invested intoequipment leases yielding 15% per year or $13.5 million/year. From this,$2.5 million/year is again paid as management fees and the balance of$11.0 million/year is invested over 10 years. Now, if the fund does welland generates the same five times return on invested capital as theconventional Venture Capital fund, the cash flow invested would generatea return of $11 million×10 years×5 times=$550 million. In addition, inthe 10th year, the investors get back their investment of $100 millionas the leases mature regardless of the performance of the invested cashflow.

So in the first case if the fund does well, with the same $100 millioninvested in a Venture Capital fund, with the conventional fund theinvestors would receive back $325 million versus $650 million for thesecured fund according to the present invention. This is double the cashreturn that the conventional fund offers.

However, if the fund does badly and all the investments are lost, in theworst case the conventional fund investors get back nothing. However,with the secured fund model, the investors still get their principalback as the leases mature in the 10th year.

This is why this new two-tier investment structure according to thepresent invention is so attractive. It essentially enables investors toget high returns in capital investments without the high risk associatedwith conventional investments available today.

Even if an investor puts money in an investment vehicle such as privateequity fund, stock mutual fund or an individual stock, the investor runsthe risk of loss of principal since the principal is not secured. If thefund goes down in value, the investor loses money and can lose theentire principal. As a result many investors have suffered huge lossesin mutual funds and stock investments in the recent fall of the NASDAQfrom over 5,000 to under 1,600.

The present invention is directed at solving the problem of securing theinvestors capital so that an investor can make money when the stock goesup and secures the return of principal if the stock goes down. Aninvestor in a secured mutual fund using this two tier approach receivestheir principal back even if the NASDAQ drops in price because theirprincipal is not at risk.

Furthermore, investors are finding that yields on safe fixed incomeinvestments are very low. Bank CD's are yielding 2-3% per year.investment grade bonds are yielding 2-16% per year and US governmentTreasuries are yielding 2-5% per year.

This invention is further directed at solving the problem of allowinginvestors to obtain yields that are 15% per year or higher and securedby investment grade collateral.

Many start-up businesses have received millions of dollars of investorcapital that has been spent on starting the business with no revenuecoming in. This appears as a net operating loss on the balance sheet ofthe company but has little value to the start-up until it becomesprofitable.

The present invention is further directed at solving the problem ofbeing able to use these losses as an asset by the start-up company.

In theory the concept of a two-tier investment structure is not new. Aninvestor can take-their money, put it into corporate bonds with a10-year life, get a 5% return and invest the interest earned in venturecapital or stocks. The problem is that this conventional return oncapital on A, AA or AAA rated corporate bonds is still around 3-5%giving little cash returns for investment as a two-tier structure.Hence, the two-tier structure cannot work in today's environment due tothe low returns. Yet if the investor tries to get higher returns andputs the capital directly into venture capital or stock as is being doneat present, there is the risk of loss of capital. In fact, investorshave lost billions of dollars seeking high returns while the NASDAQ hasfallen from over 5,000 to under 1,600 today. Using the methodologyproposed here could have saved these companies billions of dollars.

The reason that no one has used equipment leases before, as part of atwo-tier investment structure, is because of problems in finding highyielding value in the marketplace. Furthermore, there is no NASDAQ typeexchange for equipment leases as there is for stocks or bonds, due tothe lack of uniform evaluation methodology and exchange type mechanismto trade equipment leases. New equipment leases typically yield only 4%to 8% per year rates of return. The average length of a lease istypically 1 to 50 years depending upon the type of equipment from carsthrough railcars, aircraft and barges. Hence, using equipment leasesdoes not seem to be an obvious solution to this problem.

It does become a solution when one analyzes equipment leases in greatdetail and break them up into their derivative elements. The opportunityis created when one becomes aware that the fair market value of theleased equipment decreases over time at different rates depending uponthe type of equipment but the lease payments typically remain fixed ordecline at different intervals over the length of the lease. As aresult, if these residual leases, which may be several years old, arepurchased in the secondary market and held for a predetermined optimumtime period taking the lease payments, fair market values at the time ofpurchase and sale and other related facts into consideration, then it ispossible to use these residual leases to create lease derivatives toobtain cash flows yielding 15% per year or higher.

Furthermore, the mathematical models being used can be applied uniformlythrough numerous categories of leases and the evaluation criteria andformulas used to establish rates of return for evaluating leases canalso be used as the fundamental mechanism for a NASDAQ type tradingexchange in which buyers and sellers can trade equipment leases.

Due to the complexity of evaluating hundreds and thousands of leases todetermine specific leases to be bought and sold, establishing buying andselling parameters, and then using these derivatives to construct aportfolio, we have proposed our new algorithm and methodology to becomputer implemented.

SUMMARY OF THE INVENTION

It is an object of the present invention to provide a method and anapparatus for selecting lease backed financial instrument derivativesyielding higher than market returns.

It is another object of the present invention to use the selected leasesto form a two tier investment structure.

It is a further object of the present invention to apply the two tierinvestment structure to a venture capital environment.

It is a further object of the present invention to apply the two tierinvestment structure to a private and/or public equity environmentincluding stock mutual funds.

It is a further object of the present invention to apply the two tierinvestment structure to a debt instrument environment including bondfunds.

It is a further object of the present invention to use the uniformevaluation methodology and basic mathematical formulas and algorithms inthis patent to create a NASDAQ type trading exchange to trade equipmentleases as there is for stock trading.

It is a further object of the present invention to apply the two tierinvestment structure to create new financial instrument derivatives forsecuring investments in venture capital, private equity, mutual fundsand other types of funds through the use of a computer system thatembodies the process.

These and other objects of the present invention will become apparent tothose skilled in the art upon the following description of theinvention.

According to one aspect of the present invention a method for selectingleases to optimize an investment portfolio is provided including thesteps of receiving data concerning an equipment purchase price, anequipment sale price, a number of units, a lease purchase price, a lifeof lease, a lease acquisition fee, an accelerated depreciation ofchange, and a yearly payment; calculating a total purchase price byadding the lease purchase price to the lease acquisition fee;calculating an accelerated depreciation result by multiplying theindividual purchase price by the number of units; calculating a rate ofreturn by subtracting from the yearly payment the total purchase priceand the accelerated depreciation result and dividing by the leasepurchase price; and selecting a lease based on the rate of return beinggreater or equal to a predetermined value.

According to another aspect of the present invention an apparatus forfacilitating a selection of leases to optimize an investment portfoliois provided including a storage device; and a processor connected to thestorage device, the storage device storing a program for controlling theprocessor, wherein the processor operates with the program for receivingdata concerning an equipment purchase price, an equipment sale price, anumber of units, a lease purchase price, a life of lease, a leaseacquisition fee, an accelerated depreciation of change, and a yearlypayment; calculating a total purchase price by adding the lease purchaseprice to the lease acquisition fee; calculating an accelerateddepreciation result by multiplying the individual purchase price by thenumber of units; calculating a rate of return by subtracting from theyearly payment the total purchase price and the accelerated depreciationresult and dividing by the lease purchase price; and selecting a leasebased on the rate of return being greater or equal to a predeterminedvalue.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a block diagram illustrating the overall computer system usedin the present invention;

FIG. 2 is a dataflow diagram illustrating the core processes, inputs,and outputs of the processes in accordance with the principles of theinvention organized and applied within the computer system components;

FIG. 3 is a dataflow diagram illustrating the acquisition process, itsinputs, and outputs;

FIG. 4 is a flowchart illustrating the collection of the requiredformula variables provided typically by a broker, for example, used asinput to the algorithms necessary to analyze, identify, and select theleases meeting the criteria for acquisition in accordance with theprinciples of the invention;

FIG. 5 is a flowchart illustrating the collection of informationsupplied by a buyer, for example, which states the buyer's desire forspecific criteria to be meant in selecting the types of leases to beconsidered for acquisition;

FIG. 6 is a flowchart illustrating the required steps in the formula toobtain the necessary values to select candidate lease instruments;

FIG. 7 is a flowchart illustrating the required steps to establish thevariables necessary to formulate optimal time periods for determininglease payments, fair market values and their rates of return by creatingdynamic tables to store the calculated results of the formulas;

FIG. 8 is a flowchart illustrating the steps for selecting a collateralinstrument using the data collected;

FIG. 9 is a flowchart illustrating the default steps for determiningwhether a collateral instrument meets the length of lease requirementset forth in accordance with the principles of the invention; and

FIG. 10 is a flowchart illustrating the selection optimization processwhich either uses the buyers input variables or the default tablesaccording to the present invention to generate the deal sheet, whichrepresents an offer to establish a portfolio or to add to an existingportfolio.

FIG. 11 is a graphic that illustrates the typical changes in fair marketvalues for equipment leases.

DETAILED DESCRIPTION OF THE INVENTION

The present invention is a business method process which createsderivative investment vehicles from residual equipment leases and othercollateral instruments by means of an agent data application andprocessing program which breaks down the leases into derivatives stripsof principal and income in tandem with given investment and businessvariables. These derivatives can then be used to create secured venturecapital, private equity, public equity and debt instrument funds wherethe investors may obtain above market yields with up to 100% security oftheir invested capital.

The following variables will be used in the description of the presentinvention and are defined herein:

EPP = Individual Equipment Purchase Price ($) ** EEPP = IndividualEquipment Sale Price ** NU = Number of Units ** LPP = Lease PurchasePrice ($) ** TP = Table Pointer (based on 1 to Length of Lease) YP (TP)= Yearly Payment ** LLM = Life of Lease in Months ** LMFD % = LeaseManagement Fees (%) ** LAF$ = Lease Acquisition Fees ($) ** LAFD % =Default Lease Acquisition Fee (%) ** AD % = Accelerated Depreciation %of Change GI = Investment Grade Rating of lease owner ** TE = Type ofequipment being leased ** TI = Type of investment vehicle, for example,Venture capital, Private equity, public equity or debt instrument ** MRR% = Minimum Rate of Return *** MGI = Minimum Grade of Investment ***MLOL = Minimum Length of Lease *** PTE = Preferred Type of Equipment ***ALP$ = Amount of Leases to Purchase *** TPP = Total Purchase Price FMVE= Flair Market Value at End of Lease REOL = Residual at End of Lease LOL= Length of lease in years SLD = Straight Line Depreciation LAF % =Lease Acquisition Fees (%) ACFY = Annual Pretax Cash Flow Yield PPM =Payments Per Month PPY = Payments Per year FMVS (TP) = Straight LineDepreciation Results FMVA (TP) = Accelerated Depreciation Results RR(TP) = Rate of return per year for different Lengths of Lease todetermine best holding period for leases being considered for purchasedto maximize rate of return percentage. RRT = Rate of Return Total is anaccumulator for all years calculated by the RR(TP) formula. For eachyear calculated the results are added to this variable. RRA = Rate ofReturn Average for all years calculated. ** These formula variables areusually provided by a Broker or lease seller. *** These variables areoptional and are usually provided by the Buyer for the selection of alease. If the variables are not provided, the present invention usesdefault tables to select the leases.

The present invention describes a unique business method andcomputer-implemented process to achieve the above-noted secured typeInvestment objectives.

The method works as follows. Instead of making a direct investment intoa business seeking capital, the investor engages in a two-tierinvestment strategy by first using the principal to acquire or financeacquisition by a buyer or fund of collateral such as an equipment lease.

Further, the investor invests or acquires rights in seasoned collateralinstruments at a discount. The collateral instrument can be equipmentleases, bonds, Treasury bills, preferred stock, asset backed securities,securities credit card debt, mortgages—essentially any financialinstrument that has both principal and interest components with low riskand high cash flow. After acquiring this low risk collateral the cashflow and/or interest from the collateral instrument is then invested inthe start-up businesses or a fund by means of loan and/or equityinvestment. The principal of the collateral acquired is not invested inthe business and remains secure. If the investor assigns its rights tothe collateral, it finances the purchase of the collateral by thebusiness which becomes the owner of the collateral and which repays theloan and interest and retains any excess collateral income for itscapital needs.

In theory, investors can achieve similar results by using existingtechniques such as investing their principal and in real estate such asan apartment building and then using the rent from the real estatetransaction to invest in venture capital. In practice, this does notwork because the rent payments from real estate are usually barelyenough to pay the operating costs of the building leaving little or nocash flow available for investment. This is also the case for most wellknown high yield debt investments like 10 year US Government Treasurybills that are yielding only 4-5% per year.

Our research has shown that it is virtually impossible for investors toobtain yields over market rates currently at 4-6% per year with theirprincipal being secured by investment grade paper.

The present invention provides the unique ability to identify, selectand analyze existing financial instruments, subject them to the novelmathematical models described herein, and using various criteria, mix,match, assess and combine with other securities to come forth with a newderivative financial instrument. This process requires searching andmatching through thousands of instruments, hence requiring the benefitof a computer implemented process.

As an example, the equipment-leasing marketplace in the US is $280billion/year. This represents millions of leases yearly. Most new leasepaper yields about 2-7% per year and many leases are offered for saleand resale. There is no NASDAQ type exchange for leases in the US andbrokers typically offer leases to investors on a piecemeal basis, asevery lease is different. The method according to the present inventionallows the user to enter all the information about the leases into thedatabase, assess it against the criteria using the predefined Formulasto help identify, select and acquire the appropriate leases to go intothe derivatives, which would then be structured. The selectionmethodology and computer program can further be extended to create anequipment lease exchange similar to the NASDAQ.

For example, 2,000 different leases a week for sale can be received by10 brokers from 2000 individual owners and businesses with varying fairmarket values at the end of the lease term. This can consist of 700different car leases with 1 to 4 year lives yielding 2-7% per year, 300aircraft leases with 2 to 20 year lives yielding 3-15% per year, and1,000 railcar leases with 0 to 50 year lives with payments of $600 permonth per car with unknown yields. The process will take all thisinformation, enter it into the database, apply the formulas, analyze itand provide selections for acquisition. The results may be to acquire 15residual railcar leases in which the equipment is owned by, an AAinvestment grade company, which are 20 years old with a 50 year life, onwhich the fair market value today is $30,000 per car and hold them for amaximum of ten years with a projected resale value of $27,000 perrailcar and a resultant lease yield of 17.3% per year over the life ofthe holding period.

These leases may then be combined with hundreds of other leases tocreate financial instrument derivatives forming the basis of a new $100million secured venture capital fund, for example, with a cash flowavailable for investment of 15% per year or $15.0 million. The fundwould then invest only the cash flow from these leases in start-upsusing various criteria so that even if the start-up is lost, theinvestor's principal is secured by the underlying railcar leases andequipment and is repaid at the maturity of the leases.

The cash flow from the collateral instrument is treated as income, notequity, for the business, enhancing a start-up business' financialstatement. Hence the structure is of particular benefit for companieswith accrued net operating losses.

The graphic shown in FIG. 11 illustrates typical changes in fair marketvalues for equipment leases. FMV1 represents the purchase price of theequipment at the start of the lease. Year A represents the year when thelease is offered for sale by the buyer at FMVA $ with the remaining lifeof 30 years. The mathematical algorithm according to the presentinvention checks different holding periods and finds the best time tobuy, hold, and sell the lease to maximize the rate of return.

The present invention creates new financial instrument derivatives forsecuring investments in venture capital, private equity, mutual fundsand other types of funds through the use of a computer system thatembodies a process of and method for acquisition, contract closing,contract administration and liquidation which includes targeting offinancial instruments and depreciated collateral derivatives. Itincludes the data architecture, application, processes, and methodologyfor acquiring, managing and distributing the financial instruments.

It creates derivative investment vehicles from collateral based upondefined criteria for mitigating risks (tax, structure, operator,collateral, residual values) by means of an agent data application andgroup of processing programs which breaks down the collateral intoderivatives strips of principal and income in tandem with giveninvestment and business variables.

It creates the process whereby financing can specifically be provided tobusiness borrowers whose balance sheets have net operating losses or anyrisk prone investment using the identification, analysis and selectionmethodology and process to acquire collateral instruments to support therisk.

The method according to the present invention is used to provide asecured investment vehicle to organizations investing in private orpublic companies or any high-risk venture.

The present invention is now described more fully hereinafter withreference to the accompanying drawings, in which preferred embodimentsof the invention are shown. This invention may, however, be embodied inmany different forms and should not be construed as limited to theembodiments set forth herein rather, these embodiments are provided sothat this disclosure will be thorough and complete, and will fullyconvey the scope of the invention to those skilled in the art. Eachdrawn object contains numbers to assist with the explanations of theworkflow and like elements throughout.

The system architecture of a first embodiment of the apparatus andmethod of the present invention is illustrated with reference to FIGS. 1through 3. As shown in FIG. 1, the apparatus of the present inventioncomprises data sources 110, interface unit 120, memory 130, controlprocessor 140, inquiry request unit 150, storage medium 160, visualdisplay device 170, and hardcopy device 180 (collectively referred as“physical hardware components”).

Using the above components, the present invention provides a method andapparatus to collect data from internal and external sources, which arerequired for submission to the acquisition decision process, and thenused to identify potential investment candidates.

A conventional personal computer or computer workstation with sufficientmemory and processing capability may be used as the data processor 140.The data processor 140 must be capable of high volume transactionprocessing, performing a significant number of mathematical calculationsin processing communications and database searches. This processor canhave a 32-bit architecture, for example.

Now turning to FIG. 2, the Core Process Inputs & Outputs are described.The acquisition processor 220 comprises two sub-components supportingthe transfer and storage of data, calculation for the selection process,risk evaluation and selection optimizer attendant to the methodaccording to the present invention. The acquisition processor 220 willsupport various types of data entry vehicles, such as web-based manualentry, local manual entry and a digital file entry. The acquisitionprocessor will collect the data from lease sources 210, as shown indetail in FIG. 4, and the fund sources 240, as shown in detail in FIG.10, apply the formulas to the collected data, store the data in the dealdatabase 250 and produce deal sheets 230 representing leases meetingeither a default selection criteria or a buyer entered selectioncriteria, as shown in detail in FIG. 10, which is passed along to fundmanagement organizations 240 using the deal sheets 230.

FIG. 3 represents the two sub-components of the acquisition processor220 of in FIG. 2. The deal filter 320, which collects the data, storesthe data and applies the formulas to set up the selection process, andrisk mitigation 350, which uses the default Tables 1, or 2, or 3, or 4,and 5 to complete the selection process or the buyer entered variables,as shown in FIG. 10, to produce a deal sheet 370. The default Tables 1-4are presented below.

The lease sources 310 are the same as the lease sources 210 shown inFIG. 2, the deal database 340 is the same as the deal database 250 ofFIG. 2, the funds 380 and 390 are the same as the fund 240 of FIG. 2,and the deal sheets 370 are the same as the deal sheets 230 of FIG. 2.The user agent 360 is the buyer, as described in detail in FIG. 10.

The data is input through the interface unit 120 of FIG. 1. In anexemplary embodiment it is a conventional personal computer having aninput device, such as a keyboard, mouse, or conventional voicerecognition software package, a display device, such as a video monitor,a processing device such as a CPU, and a network interface such as amodem. These devices interface with the control processor 140 of FIG. 1.Alternatively, the lease source 310 may also be voice mail systems, orother electronic or voice communications systems. Devices such as faxmachines or pagers are also suitable interface devices.

The data storage medium 160 of FIG. 1 is a conventional magnetic-basedhard disk storage unit, for example, such as those manufactured byvarious peripheral companies. It will contain the deal database 340,which stores the values of Tables 1, 2, 3, 4, and 5 shown below alongwith other values that define the data sources, the formula algorithms,descriptions of the equipment, terms of the deals and clients licensedto use the invention.

The variables to be used by the novel formula according to the presentinvention were defined above and include information about theequipment, such as, individual equipment price, end of lease equipmentpurchase price, numbers of units, the lease purchase price, life oflease in months, default lease acquisition fees percentage, leaseacquisition fee dollar amounts, accelerated depreciation percentage ofchange, and tables containing yearly payments, which represent rentalincome, type of instrument, type of equipment, grade of investment,minimum rate of return, minimum grade of investment, minimum length oflease, preferred type of equipment and amount of lease to purchase.

The above mentioned data specific to the formulas is the core of thedata needed to perform the selection process, however, the supportingdata that identifies the sources, identifying characteristics of thedeal and terms is collected and stored by the computer applicationsystem supporting the invention.

The collection of core variables is illustrated in FIG. 4. Thisvariables are typically entered or provided by a lease broker, FIG. 4includes the following steps: obtain and store the EPP variable, whichrepresents the individual equipment purchase price, step 410; the EEPPvariable, which represents the end of lease individual equipmentpurchase price, step 415; the NU variable, which represents the numberof units, step 420; the LPP variable, which represents lease purchaseprice, step 425; the LLM variable, which represents the life of thelease stated in months, step 430; the LOL variable which represents thelength of lease is calculated by dividing the life of the lease statedin months, the LLM variable, by 12, step 435; the LAFD % variable whichis the default lease acquisition fees stated as a percentage, step 440;the LAF$ variable which represents the lease acquisition fees stated indollars, step 445; the TE variable which represent the type ofequipment, 450, and the AD % variable which represents the accelerateddepreciation percentage, step 455.

The following data is collected and stored using a dynamic table, whichallows the creation of a table using the length of lease variable, LOL,as the parameter to define the number of entries to the table, and oncedefined, using a table pointer, the TP variable as a counter todetermine which yearly payment YP variable cell in the table the datawill be entered into. In step 460, the dynamic table pointer, (TP) isset to 1, which represents the first entry in the table, in step 465,the table pointer, (TP) is compared to the length of the lease, LOLvariable to determined whether the dynamic table has reached its limit,when the dynamic table reaches its limit, the process will be divertedto branch to the collect buyer entry variables, step 480. If the dynamictable pointer, (TP) has not reached its limit, the broker enters thefirst years payment YP(TP), step 470, one is added to the dynamic tablepointer, (TP), step 475 and the process branches back to the tablepointer and length of lease compare step 465 until all entries arecompleted.

These variables are presented through various presentation mediums, suchas, a web-based form, an application program form or a file-processingprogram. The same logic will apply no matter in which medium the data iscollected.

FIG. 5 represents the data to be collected from a buyer, for example.The buyer may or may not exist or the buyer may wish to use the defaultvariables for the selection process. Step 510 checks to see whether abuyer exists or not. If a buyer does not exist, the process branches tothe deal selection calculations defined in step 520 shown in detail inFIG. 6.

If a buyer does exist, the process allows data specific to the buyer'slease selection criteria to be collected, such as, the minimum rate ofreturn variable MRR % in step 530; the minimum grade of investmentvariable MGI in step 540, the minimum length of lease variable MLOL instep 550; the preferred type of equipment variable PTE in step 560; theamount of lease to be purchased variable ALP$ in step 570; and thenbranches to the deal selection calculations, in step 580.

The buyer does not have to complete all entries, any combination of datacan be entered. When the process encounters empty variables, the defaultvalues will be used in place of the buyer variables. For example, if thebuyer does not enter minimum rate of return, the present invention willselect the highest rate of return that is calculated by the calculatedrate of return process.

The data collection steps in FIG. 4 are used to apply the deal selectionformula in FIG. 6, which illustrates the required steps for deriving therate of return variable according to the present invention and accordingto the present invention and used as input to the risk mitigationprocess, 350 of FIG. 3. The TPP variable represents the total purchaseprice and is calculated by adding lease purchase price, LPP, and thelease acquisition fees in dollars LAF$, step 610.

The FMVE variable represents the fair market value at the end of leaseand is calculated by multiplying the end of lease equipment purchaseprice, EEPP, by the number of units, NU, step 615.

The REOL variable represents the residual at the end of lease and iscalculated by first multiplying the end of lease equipment purchaseprice, EEPP, by the number of units, NU, and then subtracting theaccelerated depreciation percent of change, AD %, from 100 and using theresults to multiply by the first calculations results, step 620.

The next step, 625, calculates the straight line depreciation amount,SLD, by subtracting the fair market value at end of lease, FMVE, fromthe total purchase price, TPP and then dividing the results by thelength of lease, LOL.

The next step, 630, calculates the lease acquisition fees percentage,LAF %, by first multiplying the individual equipment purchase price,EPP, by the number of units, NU, and dividing the results by theindividual equipment purchase price dollars, LAF$.

The ACFY variable represents the annual pretax cash flow yield and iscalculated by first adding all of the yearly payments YP in the dynamictable, storing the information using the table pointer, TP, to point tothe next element to be added and then dividing the results by the lengthof lease, LOL and then dividing that result by the total purchase price,TPP, in step 635.

The next step, 640 calculates the payment per month, PPM by dividing thefirst yearly payment by 12. This is for informational purposes and isstored as data. The yearly payments are stored in a dynamic table,accessed by the dynamic table pointer, TP. The table pointer is not usedto access to first entry in the table, but rather a hard coded 1 is usedin its' place. This process can be altered to accumulate all of theyearly payments and average them based on the length of lease.

The next step, 645 calculates the payments per year, PPY by multiplyingthe first yearly payment by 12. This is done as a default when thebroker enters only one payment per year. This is also used as a default.Once this step is completed, step 650 will branch to calculate the rateof return.

Now turning to FIG. 7, calculating the rate of return involvesestablishing a dynamic table containing the straight-line depreciation,accelerated depreciation and the rate of return.

The above mentioned data will be collected and stored using a dynamictable, which allows the creation of a table using the length of leasevariable, LOL, as the parameter to define the number of entries to thetable, and once defined, using a table pointer, the TP variable as acounter to determine which cell in the table will contain the calculatedentry. In step 705, the dynamic table pointer, (TP) is set to 1, whichrepresents the first entry in the table, in step 710, the table pointer,(TP) is compared to the length of the lease, LOL variable to determinedwhether the dynamic table has reached its' limit. When the dynamic tablereaches its limit, the process will calculate the Rate of Return Averagein step 715, and then be diverted to branch to the acquisitionsselection process, shown in FIG. 8, step 716. If the dynamic tablepointer, (TP) has not reached its limit, the table pointer, TP will bechecked to determine if the value of TP is 1, step 720.

When the value of the table point, TP, is equal to 1, in step 725 iswhere the straight line depreciation results FMVS, for the first entryin the table, is calculated by multiplying the individual equipmentpurchase price, EPP, by the number of units, NU, adding the leaseacquisition fees dollar amount, LAF$, to the results and subtracting thestraight line depreciation amount, SLD from its results. The next step,730 is where the accelerated depreciation results, FMVA, is calculatedby multiplying the individual equipment price, EPP, by the number ofunits, NU, and storing the results in the first entry of the dynamictable. Step 735 determines the rate of return by using calculatedresults in the dynamic tables containing the yearly payments and theaccelerated depreciation results to calculate the rate of return asfollows: the yearly payment, YP(TP) is subtracted from the totalpurchase price, TPP, with the results being subtracted from accelerateddepreciation results, FMVA(TP) and then divided by lease purchase price,LPP. A “1” is then added to the dynamic table pointer, TP, in step 755.Step 755 then branches back to step 710 to perform the comparison again.

When the value of the table point, TP is greater than 1, step 740 iswhere the straight line depreciation results, FMVS, for the next entryin the table is calculated by subtracting the straight line depreciationamount from the previous straight line deprecation results, FMVS(TP−1).The way this is done is using the table pointer, TP, to point to thenext entry and then addressing the previous entry by using a minus 1.This method allows referencing two elements in the dynamic table at thesame time.

The next step, 745 is where the accelerated depreciation results, FMVA,are calculated. It uses the same two-element reference as done in step740. It is calculated by subtracting the accelerated depreciationresults, FMVA(TP−1) from the previous accelerated depreciation results,then subtracting the fair market value at end of lease, FMVE, and thenmultiplying the results by the accelerated depreciation percentage ofchange, AD %. Step 750 determines the rate of return by using calculatedresults in the dynamic tables containing the yearly payments and theaccelerated depreciation results to calculate the rate of return asfollows: the yearly payment, YP(TP−1), which is the previous yearlypayment, is subtracted from the total purchase price, TPP with theresults being subtracted from previous accelerated depreciation results,FMVA(TP−1) and divided by the table pointer, TP and then divided bylease purchase price, LPP. A “1” is then added to the dynamic tablepointer, TP, in step 755. Step 755 then branches back to step 710 toperform the comparison again.

Once the core data is collected, it will be subjected to thecalculations resulting in the rate of return required by the riskmitigation process 350 of FIG. 3 which is shown in detail in FIG. 8 anduses the results to perform the selection process.

At the end of the selection process illustrated in FIGS. 6 and 7 thefollowing calculations will have been performed:

TPP = LPP + LAF$ FMVE = EEPP * NU REOL = (EEPP * NU) * (100 − AD %) SLD= (TPP − FMVE)/LOL LAF % = LAF$/(EPP * NU) ACFY = SUM (YP, 1 toLOL)/LOL/TPP PPM = YP(1)/12 PPY = YP(1) * 12 FMVS (TP) = EPP * NU + LAF$− SLD FMVA (TP) = EPP * NU RR (TP) = (YP (TP) − TPP − (FMVA (TP)))/LPPFMVS (TP) = FMVS (TP-1) − SLD FMVA (TP) = FMVA (TP-1) − FMVE * AD % RR(TP) = YP (TP-1) − TPP − FMVA(TP-1)/TP/LPP RRT = RR(TP) + RRT RRA =RRT/LOL

FIG. 8 represents one of the processes mentioned in FIG. 3, riskmitigation, 350. The acquisition selection process represented in FIG.6, which is part of risk mitigation, 350, collects two data elementsthrough data entry by a user agent, 360, and stores them in variables tobe used with the variables collected and calculated in the deal filterprocess, 320. The primary objective of the steps in FIG. 8 is to set uppointers to identify the tables to use from Tables 1-5 below and theexact row and column address to the value stored in the table. Thevalues stored in the tables determine whether a proposed acquisition isaccepted or rejected.

The TI variable represents the type of financial instrument. There arefour types of financial instruments considered, venture capital, privateequity, public equity, and debt instruments. A table representing eachone of these financial instruments is presented below. Contained inthese tables is information about level of risk that dictates whetherthe acquisition is accepted or rejected based on the calculated rate ofreturn. This entered variable, TI, identifies which table will be used.

Following are Tables 1-5. Tables 1-4 contain information relating to thelevel of risk and are used to decide whether the acquisition should beaccepted or rejected based on the calculated rate of return RR. Table 5provides a selection criteria based on the length of the lease.

Table 1—Contains rate of return, investment grade ratings and selectioncriteria that is used by the collected variables and rate of returnformula to determine whether the lease can be used as a tieredderivative for Venture Capital.

Table 2—Contains rate of return, investment grade ratings and selectioncriteria that is used by the collected variables and rate of returnformula to determine whether the lease can be used as a tieredderivative for Private Equity.

Table 3—Contains rate of return, investment grade ratings and selectioncriteria that is used by the collected variables and rate of returnformula to determine whether the lease can be used as a tieredderivative for Public Equity.

Table 4—Contains rate of return, investment grade ratings and selectioncriteria that is used by the collected variables and rate of returnformula to determine whether the lease can be used as a tieredderivative for Debt Instruments.

Table 5—Contains number of years before the lease is liquidated, and thetype of tiered derivative as calculated by length of lease formula todetermine which tiered derivative best fits the selection criteria.

TABLE 1 Venture Capital Acquisition Table Venture Capital InvestmentGrade Rating Rate of Return <BBB BBB -A- -AA- AAA 1.00% No No No No No2.00% No No No No No 3.00% No No No No No 4.00% No No No No No 5.00% NoNo No No No 6.00% No No No No No 7.00% No No No No No 8.00% No No No NoNo 9.00% No No No No No 10.00% No No No No No 11.00% No No No No No12.00% No No No No Yes 13.00% No No No Yes Yes 14.00% No No Yes Yes Yes15.00% No Yes Yes Yes Yes 16.00% No Yes Yes Yes Yes 17.00% No Yes YesYes Yes 18.00% No Yes Yes Yes Yes 19.00% No Yes Yes Yes Yes 20.00% NoYes Yes Yes Yes VC = Venture Capital TI = Type of Instrument GI = Gradeof Investment RR = Rate of Return CP = Column Pointer RP = Row PointerIf TI = “Venture Capital” Then Use VC Acquisition Table If GI = “<BBB”Then CP is 2 If GI = “BBB” Then CP is 3 If GI = “A” Then CP is 4 If GI =“AA” Then CP is 5 If GI = “AAA” Then CP is 6 RP = the value of RR If VCAcquisition Table (CP, RP) not = “YES” Then Reject Acquisition End-If

TABLE 2 Private Equity Acquisition Table Private Equity Investment GradeRating Rate of Return <BBB BBB -A- -AA- AAA 1.00% No No No No No 2.00%No No No No No 3.00% No No No No No 4.00% No No No No No 5.00% No No NoNo No 6.00% No No No No No 7.00% No No No No No 8.00% No No No No No9.00% No No No No No 10.00% No No No No Yes 11.00% No No No Yes Yes12.00% No No Yes Yes Yes 13.00% No Yes Yes Yes Yes 14.00% No Yes Yes YesYes 15.00% No Yes Yes Yes Yes 16.00% No Yes Yes Yes Yes 17.00% No YesYes Yes Yes 18.00% No Yes Yes Yes Yes 19.00% No Yes Yes Yes Yes 20.00%No Yes Yes Yes Yes PE = Private Equity TI = Type of Instrument GI =Grade of Investment RR = Rate of Return CP = Column Pointer RP = RowPointer If TI = “Private Equity” Then Use PE Acquisition Table If GI =“<BBB” Then CP is 2 If GI = “BBB” Then CP is 3 If GI = “A” Then CP is 4If GI = “AA” Then CP is 5 If GI = “AAA” Then CP is 6 RP = the value ofRR If PE Acquisition Table (CP, RP) not = “YES” Then Reject AcquisitionEnd-If

TABLE 3 Public Equity Acquisition Table Public Equity Investment GradeRating Rate of Return <BBB BBB -A- -AA- AAA 1.00% No No No No No 2.00%No No No No No 3.00% No No No No No 4.00% No No No No No 5.00% No No NoNo No 6.00% No No No No No 7.00% No No No No No 8.00% No No No No No9.00% No No No No Yes 10.00% No No No Yes Yes 11.00% No No Yes Yes Yes12.00% No Yes Yes Yes Yes 13.00% No Yes Yes Yes Yes 14.00% No Yes YesYes Yes 15.00% No Yes Yes Yes Yes 16.00% No Yes Yes Yes Yes 17.00% NoYes Yes Yes Yes 18.00% No Yes Yes Yes Yes 19.00% No Yes Yes Yes Yes20.00% No Yes Yes Yes Yes PBE = Public Equity TI = Type of Instrument GI= Grade of Investment RR = Rate of Return CP = Column Pointer RP = RowPointer If TI = “Public Equity” Then Use PBE Acquisition Table If GI =“<BBB” Then CP is 2 If GI = “BBB” Then CP is 3 If GI = “A” Then CP is 4If GI = “AA” Then CP is 5 If GI = “AAA” Then CP is 6 RP = the value ofRR If PBE Acquisition Table (CP, RP) not = “YES” Then Reject AcquisitionEnd-If

TABLE 4 Debt Instruments Acquisition Table Debt Instruments InvestmentGrade Rating Rate of Return <BBB BBB -A- -AA- AAA 1.00% No No No No No2.00% No No No No No 3.00% No No No No No 4.00% No No No No No 5.00% NoNo No No No 6.00% No No No No No 7.00% No No No No No 8.00% No No No NoYes 9.00% No No No Yes Yes 10.00% No No Yes Yes Yes 11.00% No Yes YesYes Yes 12.00% No Yes Yes Yes Yes 13.00% No Yes Yes Yes Yes 14.00% NoYes Yes Yes Yes 15.00% No Yes Yes Yes Yes 16.00% No Yes Yes Yes Yes17.00% No Yes Yes Yes Yes 18.00% No Yes Yes Yes Yes 19.00% No Yes YesYes Yes 20.00% No Yes Yes Yes Yes DI = Debt Instruments TI = Type ofInstrument GI = Grade of Investment RR = Rate of Return CP = ColumnPointer RP = Row Pointer If TI = “Debt Instruments” Then Use DIAcquisition Table If GI = “<BBB” Then CP is 2 If GI = “BBB” Then CP is 3If GI = “A” Then CP is 4 If GI = “AA” Then CP is 5 If GI = “AAA” Then CPis 6 RP = the value of RR If DI Acquisition Table (CP, RP) not = “YES”Then Reject Acquisition End-If

TABLE 5 Length of Lease Table No. of Years VC PE PBE DI 1 No No Yes Yes2 No No Yes Yes 3 No Yes Yes Yes 4 No Yes Yes Yes 5 Yes Yes Yes Yes 6Yes Yes No Yes 7 Yes Yes No Yes 8 Yes Yes No Yes 9 Yes Yes No Yes 10 YesYes No Yes NOY = Number of Years CP = Column Pointer RP = Row Pointer TI= Type of Instrument LLM = Length of Lease in Months NOY = LLM/12 RP =NOY If TI = “Venture Capital” Then CP = 2 If TI = “Private Equity” ThenCP = 3 If TI = Public Equity” Then CP = 4 If TI = “Debt Instrument” ThenCP = 5 If Length of Lease Table (CP, RP) not = “YES” Then RejectAcquisition End-if

The GI variable represents the grade of the investment. There are fivegrades of investment that are considered. These grades are consideredcredit ratings and are maintained by an external source such as Dun &Bradstreet. The grades contained in the tables are “<BBB”, “BBB”, “A”,“AA” and “AAA”. This variable is used to point to a column in each ofthe previously mentioned financial instrument tables.

Now turning to FIG. 8 the process for accepting or rejecting anacquisition based on the rate of return is illustrated. The TI variableis entered by the user agent 360 in FIG. 3 and represents the type ofinstrument, step 810. The GI variable is entered by the user agent 360in FIG. 3 and represents the grade of investment, step 820. Logic isapplied based on the entered GI value setting the CP variable, which isa column pointer, to 2, 3, 4, 5, or 6, step 830. Logic is applied basedon the value of the Rate of Return Average, RRA variable, which wascalculated in step 716 in FIG. 7, to set the RP value, which is the rowpointer, step 840. A logic statement will select the proper table fromTables 1-4 based on the value of TI, the type of instrument, step 850,and use the CP, column pointer from step 830 and RP, row pointer fromstep 840 to determine which value to check in the selected table, step860. The logic statement will determine whether the acquisition will berejected, step 870, or accepted, step 880. The deal database, 890, willbe updated with the decision.

FIG. 9 represents the other process mentioned in FIG. 3, riskmitigation, 350. The check length of lease process represented in FIG.9, which is part of risk mitigation, 350, checks the time left on thelease. This process has all of the data elements necessary to point tothe information in Table 5, length of lease table. Logic is appliedbased on the entered TI value, which is the type of instrument, settingthe CP variable, which is a column pointer, to 2, 3, 4, or 5, step 910.Logic is applied setting the RP variable, row pointer to the LLMvariable, life of lease in months divided by 12, step 920. A logicstatement will select Table 5, length of lease table, and use the CP,column pointer from step 910 and RP, row pointer from step 920 todetermine which value to check in the table 5, step 930. The logicstatement, step 940 will determine whether the acquisition will berejected, step 950 or accepted, step 960. The deal database, 970, willbe updated with the decision.

Now turn to FIG. 10 for a representation of the selection optimizationprocess. Its purpose is to determine whether the default values (Tables1-5) will be used to optimize the selection or whether to use thevariables entered by the buyer. The method does this by selecting datafrom the deal database, 1010, which is the same as the deal database 890and 970 for buyer-entered variables in step 1015. Step 1020 determinesif buyer variables exist. If no variables exist, then the deal ischecked in step 1025 to determine if it was rejected. If the deal wasnot rejected, then the default values from Tables 1-5 are used togenerate the deal sheet, in step 1030. If the deal was rejected based onthe default values then the process ends at step 1035.

If step 1020 determines that there are buyer variables, the optimizationprocess begins by sorting the lease acquisition selection by the rate ofreturn results in ascending order, step 1040. This uses the dynamictable pointer to isolate and sort data items. Once the items are sorted,step 1045 selects leases using the buyer input variables as criteria tothe database retrieval language which dynamically constructs statementsthat identifies and retrieves a subset of leases meeting the criteria.Step 1050 determines whether the lease meets the buyer's criteria, ifdoes not, step 1055 checks to see if the default process rejected thedeal. If the deal was not rejected step 1060 generates a deal sheet. Ifthe deal was rejected, then the process ends with step 1080.

If the buyer criteria is meant using the buyer input variables in step1050, then a deal sheet is created in step 1070. Step 1090 checks to seeif other leases apply. If other leases apply, the process branches tostep 1045, otherwise the process is ended in step 1080.

Thus, it is apparent that in accordance with the present invention, amethod and an apparatus that fully satisfies the objectives, aims, andadvantages is set forth above. While the invention has been described inconjunction with specific embodiments, it is evident that manyalternatives, modifications, permutations, and variations will becomeapparent to those skilled in the art in light of the foregoingdescription. Accordingly, it is intended that the present inventionembrace all such alternatives, modifications and variations as fallwithin the scope of the claims.

1. A method for selecting leases to optimize an investment portfoliocomprising the steps of: receiving data regarding an equipment purchaseprice, an equipment sale price, a number of units, a lease purchaseprice, a life of lease, a lease acquisition fee, an accelerateddepreciation of change, and a yearly payment; calculating by computer atotal purchase price by adding the lease purchase price to the leaseacquisition fee; calculating by computer an accelerated depreciationresult by multiplying the equipment purchase price by the number ofunits; calculating by computer a rate of return by subtracting from theyearly payment the total purchase price and the accelerated depreciationresult and dividing by the lease purchase price; and selecting a leasebased on the rate of return being greater or equal to a predeterminedvalue and using the selected lease to create lease backed financialinstrument derivatives and optimize the investment portfolio.
 2. Themethod according to claim 1, further comprising the steps of calculatinga fair market value at the end of lease by multiplying the equipmentsale price by the number of units; calculating a residual at end oflease by subtracting 100 from the accelerated depreciation of change andmultiplying by the equipment sale price and the number of units; andcalculating a straight line depreciation amount by subtracting the totalpurchase price from the fair market value at end of lease and dividingthe result by the life of lease.
 3. The method according to claim 2,further comprising the step of calculating a straight line depreciationresult by multiplying the equipment purchase price by the number ofunits and adding the lease acquisition fee and subtracting the straightline depreciation amount.
 4. The method according to claim 1, whereinthe predetermined value is dependent on an investment grade rating of atype of instrument.
 5. The method according to claim 4, wherein the typeof instrument is one of venture capital, private equity, public equity,and/or debt instruments.
 6. The method according to claim 5, furthercomprising the step of selecting the lease based on a length of thelease.
 7. The method according to claim 1, wherein a plurality of leasesare selected to create the lease backed financial instrumentderivatives.
 8. The method according to claim 7, wherein the investmentstructure is applied to a venture capital environment, private equity,public equity, and/or debt instruments.
 9. The method according to claim1, wherein a plurality of leases are selected to create a type oftrading exchange.
 10. An apparatus for facilitating a selection ofleases to optimize an investment portfolio, comprising: a storagedevice; a processor connected to the storage device, the storage devicestoring a program for controlling the processor, wherein the processoroperates with the program for receiving data regarding an equipmentpurchase price, an equipment sale price, a number of units, a leasepurchase price, a life of lease, a lease acquisition fee, an accelerateddepreciation of change, and a yearly payment; calculating a totalpurchase price by adding the lease purchase price to the leaseacquisition fee; calculating an accelerated depreciation result bymultiplying the individual purchase price by the number of units;calculating a rate of return by subtracting from the yearly payment thetotal purchase price and the accelerated depreciation result anddividing by the lease purchase price; and selecting a lease based on therate of return being greater or equal to a predetermined value and usingthe selected lease to create lease backed financial instrumentderivatives and optimize the investment portfolio.
 11. The apparatusaccording to claim 10, wherein the processor further operates with theprogram for calculating a fair market value at end of lease bymultiplying the equipment sale price by the number of units; calculatinga residual at end of lease by subtracting 100 from the accelerateddepreciation of change and multiplying by the equipment sale price andthe number of units; and calculating a straight line depreciation amountby subtracting the total purchase price from the fair market value atend of lease and dividing the result by the life of lease.
 12. Theapparatus according to claim 11, wherein the processor further operateswith the program for calculating a straight line depreciation result bymultiplying the equipment purchase price by the number of units andadding the lease acquisition fee and subtracting the straight linedepreciation amount.
 13. The apparatus according to claim 10, whereinthe predetermined value is dependent on an investment grade rating of atype of instrument.
 14. The apparatus according to claim 13, wherein thetype of instrument is one of venture capital, private equity, publicequity, and/or debt instruments.
 15. The apparatus according to claim14, wherein the processor further operates with the program forselecting the lease based on a length of the lease.
 16. The apparatusaccording to claim 10, wherein a plurality of leases are selected tocreate the lease backed financial instrument derivatives.
 17. Theapparatus according to claim 16, wherein the investment structure isapplied to a venture capital environment, private equity, public equity,and/or debt instruments.
 18. The apparatus according to claim 10,wherein a plurality of leases are selected to create a type of tradingexchange.